Republic of the Philippines
CENTRAL BOARD OF ASSESSMENT APPEALS
M a n i l a

LUZON HYDRO CORPORATION AND NATIONAL POWER CORPORATION,
Petitioners-Appellants,
CBAA CASES NOS. L-57 & L-59
-versus- (LBT5AA Case No. 1)
Province of Benguet
LOCAL BOARD OF ASSESSMENT APPEALS OF THE PROVINCE OF BENGUET,
Appellee,

-and-

BANGGAY T. ALWIS, Municipal Assessor of Bakun, Benguet, ERLINDA ESTEPA, Provincial Assessor of Benguet, MANUEL C. BAGAYAO, Municipal Treasuer of Bakun, Benguet, and MAURICIO B. AMBANLOC, Provincial Treasurer of Benguet,
Respondents-Appellees.
X – – – – – – – – – – – – – – – – – – – – – – – – – – – – -/

D E C I S I O N

On July 13, 2004, in LBT5AA Case No. 1 entitled “LUZON HYDRO CORPORATION, Petitioner, versus BANGGAY T. ALWIS, et al., Respondents, NATIONAL POWER CORPORATION, Intervenor”, the Local Board of Assessment Appeals for the Province of Benguet (the “LBAA”) issued a Resolution, the dispositive portion of which reads:
“From all the foregoing premises, this board hereby orders the dismissal of the Petition for lack of merit and upholds the assessment by the Respondents Municipal Officials and the Municipality of Bakun, Benguet.”

Dissatisfied with the abovementioned LBAA ruling, NPC appealed. This Board received the Appeal (dated August 11, 2004) on August 13, 2004 and docketed the same as CBAA Case No. L-57.

On August 23, 2004, another Appeal (dated August 17, 2004) from the same Local Board Resolution was received by this Board which docketed it as CBAA Case No. L-59. The second Appeal listed the same Respondents-Appellees but with LUZON HYDRO CORPORATION (LHC) as a co-petitioner with NPC.

NPC acknowledged in its petition docketed as CBAA Case No. L-57 that it received the assailed Resolution on July 23, 2004. In the appeal in CBAA Case No. L-59, it was alleged that Luzon Hydro Corporation received a copy of the same Resolution on July 27, 2004.

A joint hearing on CBAA Cases Nos. L-57 and L-59 was conducted by this Board on February 3, 2005, where the parties for NPC, LHC and Respondents-Appellees were duly represented. In that hearing, it was agreed that the two (2) appeals should be consolidated, as they are now consolidated, considering that the two (2) cases involved one and the same Resolution of the Local Board (TSN, p. 3).

CBAA CASE NO. L-57

In its Appeal docketed as CBAA Case No. 57, NPC alleged:
“This is a case for the annulment of the tax assessments issued by the Municipal Assessor of Bakun, Benguet. The assessments erroneously classified machineries forming part of the Bakun AC Hydroelectric Plant (the “Power Plant”), particularly the weir, desander and tunnel, as “industrial” instead of machineries exempt from real property taxes under Section 234(d) of the Local Government Code.
“Pursuant to the provisions of Republic Act 6957, otherwise known as the Build-Operate-and-Transfer (BOT) Law, NPC entered into a BOT scheme with Luzon Hydro Corporation (“LHC”) for the construction, operation and maintenance of the Bakun AC Hydroelectric Plant (the “Power Plant”). This arrangement was defined in a Power Purchase Agreement (“PPA”) dated November 24, 1996. A copy of the PPA is hereto attached as Annex”B”.

“The Power Plant was built on land constituting the boundaries of two municipalities. Hence, a portion of the Power Plant, particularly the Weir, Desander and the Tunnel, are located in the Municipality of Bakun, Benguet while the rest of the Power Plant is located in the Municipality of Alilem, Ilocos Sur.

“Under the PPA and pursuant to the BOT Law, LHC undertook to construct, operate and maintain the Power Plant for NPC and to deliver to NPC all electricity generated by the Power Plant. In every sense of the word, NPC is the sole beneficiary of all electricity generated by the Power Plant.

“Under the PPA, NPC acknowledged and assumed responsibility for the payment of real property taxes and rates levied on the Power Plant and its facilities. The pertinent provisions thereof reads as follows:

‘8.6 Payment by NPC of Certain Taxes

‘xxx In addition, NPC shall be responsible for the payment of (a) taxes, fees, duties charges and other levies including Input Value Added Tax on importation of equipment imposed by the National Government of the Republic of the Philippines or any agency or instrumentality thereof to which the Operator [LHC] may at any time be or become subject to (sic) in or in relation to the performance of its obligations under the (sic) Agreement, and (b) real estate taxes and assessments, rates and other charges in respect of the Site, the structures and improvements thereon, and the Power Station, xxx.’

“Pursuant to the foregoing PPA provision, LHC declared the real properties subject of the instant Petition in accordance with Section 202 of the Local Government Code, albeit in its name as naked owner of the properties, and informed the Provincial Assessor of Benguet regarding the arrangement (i.e., that NPC shall be liable for payment of real property taxes).

“On October 24, 2002, the Municipal Assessor of Bakun, Benguet, herein Respondent-Appellee Banggay T. Alwis, sent a Notice of Assessment of Real Property addressed to LHC, assessing the machineries comprising the Power Plant. A copy of the Notice of Assessment of Real Property is hereto attached as Annex “C”. Respondent-Appellee Alwis issued ARP Nos. 99-001-02570, 99-001-02571 and 99-001-02572 (Annexes “C-1 to C-3”), which classified the machineries and equipment as ‘industrial’ and assessed at 80% assessment level. The said Notice of Assessment stated that the properties subject of the assessment were allegedly classified under Section 215 of the Local Government Code as industrial on the assumption that LHC –and not NPC- is the owner of the properties and that the same are being used by LHC. Thus, the Municipal Assessor argued that the properties cannot be classified as “Special” nor subjected to the 10% assessment level.

“LHC immediately referred the matter to NPC in keeping with the PPA provisions. Consequently, Mr. Froilan A. Tampinco, then NPC’s Vice President and Head of GENCO 2 wrote Respondent-Appellee Municipal Assessor Banggay T. Alwis, stating that NPC is willing to pay real property taxes at 10% assessment level as it was currently doing in Sual, Pangasinan pursuant to an agreement with the Pangasinan Local Government Unit (LGU) to treat the generation facilities therein as “Special Class”. Further, Mr. Tampinco stated that should Respondent-Appellee Alwis find the offer unacceptable, NPC is willing to sit down with him to arrive at a mutually acceptable settlement. A copy of Mr. Tampinco’s letter is hereto attached as Annex “D”.

“In a letter dated January 2, 2003 (copy attached as Annex “E”) Respondent Alwis reiterated his stand that (1) the real properties are owned and used by LHC, a private corporation; (2) these properties cannot be classified as “Special” because NPC is not the owner and user of the properties.

“The matter remained unresolved due, in part, to the reorganization of the NPC in accordance with R.A. No. 9136 which caused the separation of key personnel from NPC; and, a directive from the Office of the Solicitor General (OSG) to cease payment of real property taxes imposed by LGUs on machineries and equipment as the same are exempt under Section 234(c) of the Local Government Code. In fact, at that time, a similar case as the instant Petition was pending before the Court of Appeals. This was between the Sangguniang Panlalawigan and Provincial Treasurer of La Union, NPC and the Bauang Private Power Corporation (BPPC).

Subsequently, the Municipal Treasurer listed LHC as a delinquent taxpayer with a view to levying the subject properties. Hence, LHC filed a Petition for the Annulment of the Notice of Assessment, Injunction and Prohibition before the Regional Trial Court of Benguet, Branch 62, against the Municipal Treasurer and Assessor of Bakun and those of the Province of Benguet.

“The parties later on agreed that NPC shall pay the taxes at 10% assessment level to prevent the issuance and/or enforcement of a Warrant of Levy in consideration of bringing the issues before the Honorable Board for resolution. Thus, the parties executed a Compromise Agreement and submitted the same for the approval of the court. A copy of the resulting Judgment on Compromise Agreement is hereto attached as Annex “F”.

“NPC joined Petitioner LHC as Petitioner-in-Intervention both in the Petition filed before the Regional Trial Court and before the Local Board of Assessment Appeals due to its interest as beneficial owner of the properties in litigation.

“Assignment of Errors

“I

“The Honorable Local Board of Assessment Appeals erred in ruling that for purposes of taxation, LHC and not NPC should be considered the owner of the Power Plant and, therefore, the party liable for the taxes sought to be collected.

“II

“The Honorable Local Board of Assessment Appeals erred in ruling that the subject properties are not exempt from real property taxes because NPC will only assume ownership thereof at a future date.

“III

“The Honorable Local Board of Assessment Appeals erred in making ownership the test of exemption from real property tax.

“Arguments

“I

“The Honorable Local Board of Assessment Appeals erred in ruling that for purposes of taxation, LHC and not NPC should be considered the owner of the Power Plant and, therefore, the party liable for the taxes sought to be collected.

“NPC is the actual, direct and exclusive user of the Power Plant and the beneficial owner thereof. NPC’s interest in the Power Plant, coupled with the provisions of the PPA, makes it the proper party subject to the real property taxes, albeit only where the real property taxes are due.

“The PPA clearly reveals the respective interest of LHC and NPC in the Power Plant. LHC retains naked ownership thereof as security until it is reimbursed of its capital expenses in the construction of the Power Plant. On the other hand, beneficial ownership of the Power Plant belongs to NPC as, in fact, all of the power generated by the Power Plant is for the sole and exclusive use of NPC.

“During the power crises in the early nineties, the government recognized the need for more facilities for the generation of power to address the power shortage. However, NPC, which is mandated by its Charter with the responsibility to provide reliable electric power to the entire country, was hampered by limited funds to finance such projects. Hence, NPC resorted to the financing scheme under the Republic Act No. 6957 as amended by Republic Act No. 7718. Otherwise known as ‘Build-Operate and Transfer Act or BOT Law’. A BOT arrangement is a financing arrangement adapted by Congress to implement the infrastructure projects and at the same time reduce the direct financial burden of the government. It is an alternative way of financing the government’s infrastructure projects other than by increasing taxes.

“Thus, under the BOT scheme, the government agency is actually a debtor and the contractor, a creditor. The BOT Law provides for a repayment scheme by means of which the government agency can reimburse the contractor of the latter’s costs in the project. Thus:

‘Section 6. Repayment Scheme. – For the financing, construction, operation and maintenance of any infrastructure project undertaken pursuant to the provisions of this Act, the contractor shall be entitled to a reasonable return of investment and operating and maintenance costs in accordance with its bid to the government agency or local government unit and incorporated in the contract’s terms and conditions. In the case of a build-operate and transfer arrangement, this repayment scheme is to be effected by authorising the contractor to charge and collect reasonable tolls, fees, rentals, and charges for the use of the project facility not exceeding those proposed in the bid and incorporated in the contract. xxx’ [emphasis ours]

“The Power Purchase Agreement (PPA) between NPC and the consortium (to which LHC succeeded) reflects the repayment scheme above-mentioned. Thus, under the PPA, NPC is obliged to pay the following fees to LHC:

‘8.5 Fees.

xxx

‘8.5.2 Cooperation Period. In respect of each Unit and each Month within the Cooperation Period of such Unit, the Operator will deliver to NPC an invoice in respect of Capital Recovery Fee, Service Fee, Operating Fee, and Energy Fee, if any, for such Month.

‘8.5.3 Pre-Transfer Period. NPC shall pay to the Operator Operating Fees for any and all electricity generated by Unit 1 during the period of expiry of its Cooperation Period up to the Transfer Date, in each case calculated as provided in the Eight Schedule.’

“It bears stressing that the fees that NPC pays the Operator, LHC, are not only intended as payment for the electric energy generated by the Power Plant, otherwise denominated as Energy Fees. More importantly, these fees, particularly, the Capacity Fees, are intended to compensate LHC for the capital expenditures incurred by the latter in the construction of the Power Plant, including the debts it incurred in relation to the construction. Capacity fees have, as components, Capital Recovery Fees and Service Fees. These fees are, in reality, instalment payments of NPC to Petitioner LHC for the Power Plant.

“Petitioner LHC is, therefore, a mere financer contractor. It advanced the cost of construction, operation and maintenance of generation facilities (i.e., the Power Plant) and retains naked ownership over the same as security until it is fully paid by NPC. Notwithstanding such retention of naked ownership, the use of the Power Plant is exclusively vested in NPC. Thus, possession of the Power Plant shall be ceded to NPC by the Operator at the end of the Cooperation period.

‘On the Transfer Date [i.e. the end of the Cooperation Period, when NPC has fully paid its obligations] the Power Station shall be transferred by the Operator to NPC without payment of any compensation xxx.’(Article 2.4 of PPA)

“Under the PPA, LHC operates and maintains the Power Plant on behalf and for the exclusive benefit of NPC. As operator of the Power Plant, LHC is, for all legal intents and purposes, under NPC’s employ with the latter exercising control and direction as regards the manner of operating the Power Plant.

“As beneficial owner of the Power Plant, NPC has a monopoly of all the electricity generated by the Power Plant, viz:

‘8.1 Supply. NPC agrees to take and pay for all electricity available from the Power Station in accordance with the procedures set out in the Sixth Schedule and the Operating Parameters. The Operator shall dedicate the entire Power Station output (net of Power Station usage) to NPC.’[emphasis ours]

“Being the beneficial owner of the Power Plant, NPC was even obliged to acquire legal title to the lands underlying the Power Plant (the ‘Site’) and declare the same in its name for taxation purposes, thus:

‘2.9 Site NPC, at no cost to the Operator, shall make the Site, including all (sic) land necessary for the tunnel and the weir, available to the Operator by the Effective Date for the purpose of constructing and operating the Power Station, and ensure that the Operator shall have peaceful and exclusive possession of the same at all times up to the Transfer Date. NPC shall obtain registered legal title to the Site in its name within one (1) years (sic) from the Effective Date, and shall execute such instruments as may be necessary to permit the annotation thereon of the Operator’s right to use the Site under this Agreement and the registration of any lien or encumbrance that the Operator may constitute over the Power Station for the purpose of financing and refinancing the cost of constructing and maintaining the Power Station and performing its other obligations under this Agreement. NPC shall assist the Operator in obtaining reasonable access to and from the Site prior to the Effective Date for the purpose of preliminary contract works.’
“Further, as beneficial owner, NPC was responsible for obtaining water rights to ensure that the Operator ‘shall be able to draw or divert water from the Bakun River at the collection point generally referred to in the First Schedule and utilize the same to meet the power generation and other requirements of the Power Station’ (Section 7.1 of PPA). Consistent with its right of ownership, NPC contracted LHC’s services for watershed maintenance in accordance with its Watershed Maintenance Program to ensure the steady supply of water to the Power Station. For this, it pays LHC Watershed Maintenance Fees (Section 7.2 of PPA).
“Furthermore, as beneficial owner of the Power Plant, NPC legally and appropriately assumed the responsibility of paying any (sic) all taxes and fees that will be imposed in connection with the construction and operation of the Power Plant, if any are due (Lands underlying the Power Plant are taxable, classified as Special Classes and subject to 10% assessment level under Sections 216 and 218(d) of the Local Government Code).
‘8.6 Payment by NPC of Certain Taxes
‘xxx In addition, NPC shall be responsible for the payment of (a) taxes, fees, duties, charges and other levies including Input Value Added Tax on importation of equipment imposed by the National Government of the Republic of the Philippines or any agency or instrumentality thereof to which the Operator [LHC]may at any time be or become subject to (sic) in or in relation to the performance of its obligations under the (sic) Agreement, and (b) real estate taxes and assessments, rates and other charges in respect of the Site, the structures and improvements thereon, and the Power Station, xxx.’ (underscoring supplied)
“The above-quoted provision would not have been legally authorized if NPC were not the owner of the Power Plant and the actual user of the same.
“During the construction of the Power Station, NPC, as beneficial owner thereof, had full authority to monitor the progress of construction, inspect the site and have access to all the plans and designs of the Power Plant, and authority to determine compliance with its specifications, viz:
‘3.4 Monitor Progress. NPC shall be entitled at its own cost to monitor the progress and quality of the design, construction, and installation work. For this purpose, the Operator shall:
(i) submit to NPC a quarterly report of work progress which shall be in such detail as is reasonable in the circumstances;
(ii) ensure that NPC and any experts appointed by NPC in connection with the Project are afforded reasonable access to the Site at times to be agreed with the Operator, provided that such access does not materially interfere with the works comprising the Project or expose any person on the Site to any danger, and provided always that the Operator shall not be liable for any damage to property or injury to persons (including death) suffered by NPC or such experts and their representatives and personnel arising during any visits to the Access Road, the Site, or the Power Station, other than those arising from the Operator’s gross negligence or willful misconduct;
(iii) upon reasonable request, make available, in a timely manner, for inspection at the Site, copies of all plans and designs described in Article 3.6, other than any proprietary information of the Operator or any of its subcontractors in relation to the Project, or any part thereof, and when requested by NPC, provide one copy of such plans and designs as may be reasonably necessary for determining compliance with the First Schedule; and
(iv) within six months after the Completion Date, supply NPC with one set of reproducible copies and five (5) sets of white print copies (or equivalent) of all “as built” plans and designs described in Article 3.6 required for the operation and/or maintenance of the Power Station.’
“Under the PPA. NPC may arrogate unto itself naked ownership of the Power Plant even prior to the end of the Cooperation Period (Section 9.5 of the PPA) by purchasing all of the Operator’s right, title and interest in and to the Power Station.
“Clearly, the foregoing allegations show overwhelming evidence and circumstances pointing to NPC as the beneficial owner of the Power Plant subject of the questioned assessment. However, NPC and the contractor (LHC) agreed to allow the latter to retain naked ownership of the Power Plant until the transfer date as security until NPC has fully paid all the costs incurred by LHC in constructing the Power Plant. To reiterate, on the Transfer Date, NPC shall simply take over the operation of the Power Station without need of paying any amount to LHC or any additional consideration since, on the said date, the full value of the Power Plant would have already been fully settled by the fees paid by NPC on instalment. In fact, no other transfer documents are needed for such transfer to be valid.
“Applicable hereto is Section 1503 of the New Civil Code which authorizes a contractual arrangement whereby possession or ownership of the goods supplied/delivered is retained by the seller/supplier for the sole purpose of securing the performance of certain obligations. Thus:
‘Section 1503. Where there is a contract of sale of specific goods, the seller may by the terms of the contract, reserve the right of possession or ownership in the goods until certain conditions have been fulfilled. The right of possession or ownership may be reserved notwithstanding the delivery of the goods to the buyer or to the carrier or other bailee for the purpose of transmission to the buyer.
‘Where goods are shipped, and by the bill of lading the goods are deliverable to the seller or his agent, or to the order of the seller or his agent, the seller thereby reserves the ownership in the goods. But if except for the form of the bill of lading, the ownership would have passed to the buyer on shipment of the goods, the seller’s property in the goods shall be deemed to be only for the purpose of securing the performance by the buyer of his obligations under the contract.’ [emphasis ours]
‘II
“The Honorable Local Board of Assessment Appeals erred in ruling that the subject properties are not exempt from real property taxes because NPC will only assume ownership thereof at a future date.
“III
“The Honorable Board of Assessment Appeals erred in making ownership, and not usage, the test of exemption from real property tax.
“The properties subject of the questioned assessments are exempt from real property taxes by virtue of Section 234 (c) of the Local Government Code and not due to contractual agreement.
“Even if under the PPA, the BOT contractor, LHC, has retained naked ownership of the machineries and equipment subject of the questioned assessments, it is respectfully submitted that the same are nevertheless, exempt from real property tax under Section 234(c) of R.A. No. 7160, otherwise known as the Local Government Code. This provision exempts from real property tax machineries and equipment that are actually, directly and exclusively used by government owned-and-controlled corporations engaged in the generation and transmission of electric power, viz:
‘Sec. 234 Exemptions from Real Property Tax. The following are exempted from payment of real property tax:
xxx
‘(c) All machineries and equipment that are actually, directly and exclusively used by local water districts and government-owned or –controlled corporations engaged in the supply and distribution of water and/or the generation and transmission of electric power.’ [emphasis ours]
“At the risk of being redundant, NPC actually, directly and exclusively uses the Power Plant, LHC being the mere Operator thereof for and on behalf of NPC. The entire output of the Power Plant is devoted exclusively for the use of NPC. LHC is not allowed to sell the electricity generated by the Power Plant to other entities.

“The tax exemption under Section 234(c) of the Local Government Code is not a consequence of ownership of the property. Rather, the property is exempt from taxes by virtue of its usage.

“It is worth emphasizing that the basis for real property taxation was changed from ownership to actual use in 1974 with the issuance of Presidential Decree No. 464, otherwise known as the Real Property Tax Code. The policy of taxing real property on the basis of actual use, even if the user is not the owner was adopted. (Province of Nueva Ecija v. Imperial Mining Co., Inc. 118 SCRA 632 [1982]). This was carried out under the Local Government Code of 1991, which provides:

‘Section 198. Fundamental Principles. – The appraisal, assessment, levy and collection of real property tax shall be guided by the following fundamental principles:

xxx

‘(b) Real property shall be classified for assessment purposes on the basis of its actual use; [emphasis supplied)

xxx

“This principle/rule was further reinforced in Section 217 of the same Code, to wit:

‘Section 217. Actual Use of Real Property as Basis for Assessment. Real property shall be classified, valued and assessed on the basis of actual use regardless of where located, whoever owns it, and whoever uses it.’ [emphasis ours)

“In real estate taxation, therefore, the unpaid tax attaches to the property and is chargeable against the taxable person who had actual or beneficial use and possession of it regardless of whether or not he is the owner (Testate Estate of Concordia T. Lim v. City of Manila, 182 SCRA 482 [1990]).

“It is, therefore, apparent that actual use rather than ownership is the primordial consideration in the classification, valuation and assessment of real property for taxation purposes. It is also the same factor considered in determining exemptions therefrom. Thus, Section 234 of the Local Government Code specifies the exemptions from real property tax:

‘Section 234. Exemptions from Real Property Tax. – The following are exempted from payment of real property tax:

(a) Real property owned by the Republic of the Philippines or any of its political subdivisions except when the beneficial use thereof has been granted, for consideration or otherwise, to a taxable person.

(b) Charitable institutions, churches, parsonages or convents appurtenant thereto, mosques, non-profit or religious cemeteries and all lands, buildings, and improvements actually, directly and exclusively used for religious, charitable or educational purposes;

(c) All machineries and equipment that are actually, directly and exclusively used by local water districts and government-owned and –controlled corporations engaged in the supply and distribution of water and/or generation and transmission of electric power;

(d) All real property owned by duly registered cooperatives as provided for under R.A. 6938; and

(e) Machinery and equipment used for pollution control and environmental protection.

xxx’
[emphasis ours]

“The exemption under Section 234 (c) of R.A. No. 7160 may, thus, be validly invoked with respect to the machineries and equipment subject of the questioned assessments. At the time when the questioned assessments were made, the said machineries and equipment of the Bakun AC Hydroelectric Power Plant were, and still are, actually, directly and exclusively used to generate electric power.

“In Mactan Cebu International Airport Authority v. Hon. Marcos (G.R. No. 120082, September 11, 1996), the Supreme Court had the occasion to classify exceptions from real property tax under the Local Government Code, to wit:

‘(a) Ownership Exemptions. Exemption from real property taxes on the basis of ownership are real properties owned by (1) the Republic. (ii) a province, (iii) a city, (iv) a municipality, (v) a barangay, and (vi) registered cooperatives.

‘(b) Character Exemptions. Exemptions from real property taxes on the basis of their character: (i) charitable institutions, (ii) houses and temples of prayer like churches, parsonages or convents appurtenant thereto, mosques, and (iii) non-profit or religious cemeteries.

‘(c) Usage Exemptions. Exempted from real property taxes on the basis of the actual, direct and exclusive use to which they are devoted are: (i) all lands, buildings and improvements that are actually, directly and exclusively used for religious, charitable and educational purposes; (ii) all machineries and equipment that are actually, directly and exclusively used by local water districts or by government-owned or –controlled corporations engaged in the supply and distribution of water and/or the generation and transmission of electric power; and, (iii) all machinery and equipment used for pollution control and environmental protection.’ [emphasis supplied)

“Consistent with the above-cited classification, the machineries and equipment subject of the questioned assessments are exempt from real property taxation by reason of usage. Hence, assuming for argument’s sake that NPC is not the owner of the machineries, the same would nevertheless remain exempt from real property taxes on account of their being actually, directly and exclusively used by NPC in the generation of electricity. Where use is the test, ownership is immaterial (City of Baguio v. Busuego; GR No. L-29772; September 18, 1980). Hence, the questioned assessments ought to be declared void and cancelled for lack of factual and/or legal basis.

“WHEREFORE, premises considered, NPC most respectfully prays that the Resolution of the Local Board of Assessment Appeals of Benguet be set aside and that judgment be rendered:

“1. Recognizing and declaring NPC as the beneficial owner, and the actual, direct and exclusive user of the Power Plant;

“2. Declaring NPC as the proper party liable for payment of real property taxes by virtue of its interest as beneficial owner of the Power Plant and the actual, direct and exclusive user thereof;

“3. The following tax declarations: ARP Nos. 99-001-02570, 99-001-02571 and 99-001-02572, be cancelled and new ones be issued re-classifying the machineries subject of the assessments as exempt from real property taxes in accordance with section 234(c) of the Local Government Code; and

“4. That any amounts advanced by NPC/LHC for the payment of taxes based on ARP Nos. 99-001-02570, 99-001-02571 and 99-001-02572 be credited against NPC’s future tax liabilities to the Province of Benguet and/or Municipality of Bakun.

CBAA CASE NO. L-59

The Appeal/Petition for Review docketed as CBAA Case No. L-59 was intended solely for Luzon Hydro Corporation (LHC), although the National Power Corporation (NPC) is listed as a co-petitioner-appellant.

The grounds upon which LHC based its Appeal are the following:
“I
“THE LBAA COMMITED GRAVE AND PALPABLE ERROR, FOR BEING CONTRARY TO LAW AND THE FACTS, IN HOLDING AND IN REASONING THAT PETITIONER-APPELLANT IS LIABLE FOR THE PAYMENT OF REAL PROPERTY TAXES ON THE GROUNDS THAT: PETITIONER APPELLANT IS THE OWNER OF THE ASSESSED PROPERTIES; THAT THE PROVINCE OF BENGUET AND THE MUNICIPALITY OF BAKUN ARE MERE NOMINAL PARTIES TO THE MOA; AND THAT THE STIPULATION UNDER THE POWER PURCHASE AGREEMENT CONCERNING NPC’S ASSUMPTION OF REAL PROPERTY TAX LIABILITIES AS APPLICABLE ONLY ‘IN THE FUTURE’.

“II

“THE LBAA GRAVELY ERRED IN SWEEPINGLY HOLDING, WITHOUT CITING ANY REASON, THAT PETITIONER-APPELLANT LIABLE IS (sic) FOR REAL PROPERTY TAXES WITH ASSESSED VALUE OF THE REAL PROPERTIES BASED ON THE SECTION 218 (C) NOT BASED ON SECTION 216 AND SECTION 234 OF THE LOCAL GOVERNMENT CODE, AND IN CLASSIFYING THE REAL PROPERTIES AS ‘INDUSTRIAL’ NOT BELONGING TO ‘SPECIAL CLASS’ AND/OR EXEMPT.”

Most of the allegations/statements/arguments contained in LHC’s Appeal/Petition (CBAA Case No. L-59) are covered by NPC’s Appeal in CBAA Case No. L-57. There are, however, certain allegations or statements and/or arguments which are uniquely applicable only to LHC, thus:
“16. The reasons why LHC is purportedly liable for real property (sic) of the LBAA can be summarized into three (3) statements or reasons. First, since LHC is the owner of the assessed properties, then it is the person liable for real property taxes. Second, that the MOA entered into by the Province of Benguet, the Municipality of Bakun, LHC and NPC is not binding against the said local government units because they are purportedly merely nominal parties. Thirdly, that the stipulation under Article 8.6 of the PPA whereby NPC assumed liability for the payment of real property taxes and other charges is not applicable for the moment but only ‘in the future’.

“17. Ownership, ipso facto, or by itself, does not automatically make LHC liable for the real property taxes. This is so because under Section 250 of the Local Government Code, the person liable to pay real property taxes is either the owner or the person having legal interest therein. NPC is a person who even has more legal interest in the assessed properties than LHC. While LHC is merely interested in recovering its investments, NPC is interested in the Power Plant and related structures because it is now paying for the Power Plant and related structures through the payment of Capacity Fees computed based on the formula provided in the 8thSchedule of the PPA. This is precisely and partly why LHC and NPC agreed that NPC shall assume payment of real property taxes among others as provided in Article 8.6 of the PPA. LHC is a mere financier-contractor of the Power Plant. The capacity fees paid or payable by NPC to LHC under the PPA are mere repayments for LHC’s investment. NPC is the beneficial owner of the Power Plant although naked ownership is retained by LHC until it is fully paid by NPC of its obligations under the PPA. In short, the PPA is merely a financing arrangement whereby NPC is the beneficial owner and actual, direct and exclusive user of the Bakun Power Plant. It should also be noted that the operation and use of the Bakun Power Plant are under the instructions of NPC’s Load Dispatcher and System Control Center.

x x x

“19. The third reason cited by the LBAA is another ‘ground’ that defies logic and blatantly disregards the facts. How can the LBAA hold that the stipulation under Article 8.6 of the PPA only applies ‘in the future’ or prospectively when NPC itself has even repeatedly admitted in writing and under oath at that, that it is the person liable for the real property taxes? This admission, which had been repeated many times over not just in letters but even in legal proceedings, is an admission of liability and under the rules of evidence, this has paramount value. Furthermore, this admission is an admission of liability by a government agency, which means to say that public funds are involved and hence is not being made simply for the sake of admitting or exculpating LHC. With such high stakes involved, how can the LBAA disregard the admission of NPC and still pin down LHC? In addition, there is nothing in Article 8.6 or even in the entire PPA itself that provides that NPC’s assumption of real property taxes only applies ‘in the future’ or prospectively. But, NPC cannot and will not renege its obligations under the PPA because of severe consequences for the government.

x x x

“22. In view of the foregoing, Petitioner is clearly not the proper party against whom the assessment should be made nor is it the proper party liable for the real estate taxes for the Bakun Power Plant. Thus, the aforesaid assessment should be made against and addressed to NPC. Clearly then, the Municipal Assessor has no authority and power to levy real property taxes against the Petitioner nor does the Provincial Treasurer of Benguet and Municipal Treasurer of Bakun, Benguet have the power and authority to collect taxes against Petitioner.

x x x

“25. In dismissing the Petition, the LBAA failed to address the issues on exemption and proper assessment level. It merely sweepingly concluded that since LHC is purportedly the liable party, the proceedings before the LBAA is not the ‘appropriate time to raise the issue on exemption’ and that ‘the level of assessment cannot also be disturbed’.

“26. Quite clearly, this evasive ratiocination is premised on the erroneous interpretation of Article 8.6 of the PPA as applicable only ‘in the future’ or prospectively. The LBAA does not seem to understand that whatever payments that will be made by LHC as real property taxes, the same are immediately recoverable against NPC. Hence, it should have made a ruling on the issue of exemption and/or the proper assessment level.

x x x

“28. Having thus established that the assumption of real property taxes by NPC is ‘in the present’, this Honorable Board should squarely rule on the issues of exemption and proper assessment level.

“29. Petitioner LHC humbly submits that the assessments are not in accordance with law since it failed to consider Section 234 of the Local Government Code. NPC is the beneficial user and ultimately the owner of the real properties assessed by the Municipal Assessor of Bakun, Benguet. As the beneficial user, NPC is entitled to exemptions from real estate tax for real properties, which are actually, directly and exclusively used by NPC in the generation of power pursuant to Section 234 of R.A. No. 7160, which provides as follows:

‘Section 234. Exemptions from Real Property Tax. The following are exempted from payment of real property tax:

x x x

(c) All machineries and equipment that are actually, directly and exclusively used by x x x government-owned or controlled corporations engaged in the x x x generation and transmission of electric power.’

“30. The assessed real properties, which are the subject of the instant case, are used by NPC in the generation of power. Under Philippine law, it is only NPC which can produce power. Independent power producers such as LHC are merely acting for and behalf of NPC. Unlike oil dependent power plants, in hydro-electric power plant, it is NPC which has the permit issued by the National Water Resources Board (NWRB) to draw water from the natural source. LHC cannot draw water from natural source. In drawing the water from the Bakun river, NPC uses the real properties that are the subject of the assessment. The Special Land Use Permit (SLUP) issued by the Department of Environment and Natural Resources for the construction and use of the tunnel is likewise issued in favor of NPC. NPC is not only the beneficial user, but is also the ultimate owner of the Bakun Power Plant and all it (sic) structures, machineries and equipment. Under Article 9.1 of the PPA, after the cooperation period of 25 years, the petitioner will transfer to NPC without any compensation all of its rights, title and interest in and to the fixtures, fittings, spare parts, plant equipment and machineries of the Bakun Power Plant. The Municipal Assessor clearly erred in assessing the real properties based on Section 218 (c) of the Local Government Code because it failed to consider the subject properties of the Bakun Power Plant to be actually, directly and exclusively used for power generation and therefore exempt from real property taxes under Section 234 of the Local Government Code.

“31. Assuming arguendo that the said properties are not exempt, at the very least, the Municipal Assessor should have classified the subject properties as falling under ‘Special Classes’ pursuant to Section 216 or 234 of the Local Government Code. Since these properties are used by NPC, which is a government-owned and controlled corporation, Petitioner humbly submits that these properties are under the classification of Special Classes of Real Property pursuant to Section 216 of the Local Government Code, which provides as follows:

‘Section 216. Special Classes of Real Property. All lands, buildings, and other improvements thereon actually, directly, and exclusively used for hospitals, cultural, or scientific purpose, and those owned and used by local water districts, and government – owned or controlled corporations rendering essential public services in the supply and distribution of water and/or generation and transmission of electrical (sic) power shall be classified as special.’

x x x

“WHEREFORE premises considered, it is respectfully prayed that this Honorable Board render judgment: (a) reversing and setting aside the July 13, 2004 Decision of Local Board Assessment of the Province of Benguet; (b) absolving Petitioner-Appellant Luzon Hydro Corporation from any liability to pay the real property taxes; and (c) nullifying and declaring the Notices of Assessment subject of the instant case as null and void.”

On October 1, 2004, this Board received from Respondents-Appellees their Answer/Comment dated September 15, 2004. Respondents said that it “respectfully submits its Answer/Comment to the Appeal of Petitioner-Appellant National Power Corporation and likewise to serve as Answer/Comment to the Appeal/Petition for review filed by Luzon Hydro Corporation (Order of the Honorable Board was received on September 10, 2004). . .”

Respondents-Appellees alleged:
“Sometime last October 24, 2002, Respondents-Appellees Bakun Municipal Officials sent notices of new assessment of real properties to Luzon Hydro Corporation classifying the real properties subject matter of this case as INDUSTRIAL with 80% Assessment Level with the corresponding real property tax due in the amount of TEN MILLION FIVE HUNDRED SEVENTY THREE THOUSAND SEVEN HUNDRED EIGHTY SIX PESOS AND 40/100 (P10,573,786.40). These notices were received by Luzon Hydro Corporation sometime last November 11, 2002.

“On November 22, 2002, respondent-appellee Municipal Assessor received a letter from Froilan A. Tampico, Vice-President and Head for GENCO 2 of National Power Corporation, informing the former that the latter is willing to pay the tax liability of herein petitioner at 10% assessment level (SPECIAL CLASS). In response to the proposal of the National Power Corporation, respondent-appellee Municipal Assessor denied the same as contained in his letter dated January 2, 2003, addressed to Mr. Tampico, received by the latter on January 10, 2003.

“On January 23, 2003, Luzon Hydro Corporation received the collection letter from respondent-appellee Municipal Treasurer, covering the years 2002 and 2003 in the total amount of P 10,996,737.86 including penalties at 2% per month (see Annex “F” of Petition).

“On August 24, 2003, the respondent-appellee Provincial Treasurer caused the publication in the Baguio Midland Courier of the subject property of this case as delinquent for non-payment of real property tax due.

“September 18, 2003, Luzon Hydro Corporation filed a petition for Annulment of Notice of Assessment and Injunction with RTC Branch 62 docketed as Civil Case No. 03-CV-1899, seeking the nullification/annulment of the Notice of Assessment, dated October 24, 2002.

“October 10, 2003, Luzon Hydro Corporation paid under protest the amount of P 2,643,446.40 covering the calendar years 2002 and 2003.

“On February 11, 2004, RTC Branch 62 rendered judgment based on a Compromise Agreement between and among Luzon Hydro Corporation, National Power Corporation (Petitioner-Appellant herein) and respondents-appellees herein. It was agreed that Luzon Hydro Corporation in the meantime, shall file the necessary petition/protest/pleading with the Local Board (sic) Assessment Appeals of the Province of Benguet (paragraph 6 of the Compromise Agreement). Likewise, National Power Corporation shall file its motion to intervene.

“On July 21, 2004, respondents-appellees received a copy of the Resolution of the Local Board of Tax Assessment Appeals (LBTAA) dated July 13, 2004. In said resolution, it dismissed the Petition for lack of merit and upheld the assessment. Also, the LBTAA stated in said resolution that the assessed properties subject of this case belongs (sic) to the LUZON HYDRO CORPORATION.

“On September 10, 2004, undersigned counsel received a copy of the Advice to Answer Appeal dated August 24, 2004.

“NPC, in its motion to intervene filed with the LBTAA, acknowledged and assumed to pay the real estate/property taxes levied on the Power Plant and its facilities. Albeit the NPC acknowledges liability it interposes exemption to the tax liability citing paragraph c, Section 234 of RA 7160 as its defense.

“ISSUES

“1. WHETHER OR NOT LBAA ERRED IN RULING THAT LUZON HYDRO CORPORATION, BEING THE OWNER AND USER OF THE SUBJECT PROPERTIES, IS LIABLE FOR THE REAL PROPERTY TAXES DUE;

“2. WHETHER OR NOT THE LBTAA ERRED IN RULING THAT THE SUBJECT PROPERTIES ARE NOT EXEMPT FROM REAL PROPERTY TAXES;

“3. WHETHER OR NOT THE LOCAL BOARD OF ASSESSMENT APPEALS OF BENGUET ERRED IN MAKING OWNERSHIP THE TEST OF EXEMPTION FROM REAL PROPERTY TAX.

“ARGUMENTS/DISCUSSIONS

“1. WHETHER OR NOT LBAA ERRED IN RULING THAT LUZON HYDRO CORPORATION, BEING THE OWNER AND USER OF THE SUBJECT PROPERTIES, IS LIABLE FOR THE REAL PROPERTY TAXES DUE.

“Based on the Power Purchase Agreement between the Petitioner-Appellant NPC and Luzon Hydro Corporation (LHC), a Build-Operate-Transfer scheme was adopted for the development of Bakun AB and C small hydroelectric facilities subject matter of this case, that prior to the transfer of these machineries to the Petitioner-Appellant NPC, LHC is the owner and user of such machineries or is the “Beneficial User” thereof. Clearly, LHC being the beneficial user of said machineries and at the same time a taxable entity shall be liable to pay the real property tax due.

“The LBTAA did not err in declaring that the subject properties are owned and used by the Luzon Hydro Corporation. LHC in its petition filed with the LBTAA admitted that NPC will become the eventual owner of the assessed properties.

“Evidently, LHC a private entity is the entity actually, directly and exclusively using the subject properties in generating power for sale to the Petitioner-Appellant NPC. The LHC being the owner and user of the subject properties, it is liable to pay real property taxes due.

“So that in the meantime that no transfer of ownership has been made, LHC shall be liable for the real property taxes.

“2. WHETHER OR NOT THE LBAA ERRED IN RULING THAT THE SUBJECT PROPERTIES ARE NOT EXEMPT FROM REAL PROPERTY TAXES.

“It can be recalled that sometime on November 22, 2002, no less than Froilan A. Tampico, Vice-President and Head for GENCO 2 of National Power Corporation offered to pay the tax liability of herein LHC at 10% assessment level (SPECIAL CLASS). This is an admission that there exists a real property tax due the respondent-appellees.

“The claim of petitioner-appellant NPC that the machineries shall be classified as Special Class and not Industrial can not hold water. Section 216 of R.A. 7160 specifically enumerated the special classes of real properties, the section reads:

‘SECTION 216. Special Classes of Real Properties. – All lands, building and other improvements thereon actually, directly and exclusively used for hospital, cultural, or scientific purposes, and those owned and used by local water districts, and government-owned and controlled corporations rendering essential public service in the supply and distribution of water and/or generation and transmission of electric power shall be classified as special (emphasis supplied)’

“Nowhere in said section can accommodate the claim of Petitioner-Appellant NPC.

“Without doubt, the subject machineries being owned and used by LHC, a private entity, Petitioner-Appellant NPC cannot claim that it is the owner and the user of the subject machineries for the same to be classified as “SPECIAL CLASS”.

“Further, under the PPA mentioned, ownership of the machineries shall be transferred to NPC only after the lapse of the period agreed upon in the Build-Operate-Transfer (BOT) provision.

“Petitioner-Appellant NPC, not being able to prevail over herein Respondents-Appellees that the subject properties be classified as Special Class, now claims that it is exempt from paying the real property tax due bolstering its claim on Paragraph C of Section 234 of R.A. 7160, which reads:

‘SECTION 234. Exemption from Real Property Tax.- The following are exempt from payment of the real property tax:
x x x
(c) All machineries and equipment that are actually, directly and exclusively used by local water districts and government-owned or-controlled corporations engaged in the supply and distribution of water and/or generation and transmission of electric power.’

“Petitioner-Appellant NPC cannot invoke the afore-cited section for exemption because the subject properties are owned and actually, directly and exclusively used by the LHC, not NPC, in generating power for the latter for a fee.

“Settled is the rule that tax exemptions shall be construed against the taxpayer under the principle of stricissimi (sic) juris. ‘Claims for tax exemption are construed strongly against the claimant. They must also be shown to exist clearly and categorically and supported by clear and legal provisions. Taxes are the lifeblood of the nation. Their primary purpose is to generate funds for the State to finance the needs of the citizenry and to advance the common weal’ (NPC v. The Province of Albay, et al. G.R. No. 87479).

“Assuming, but not necessarily admitting that NPC is exempt from paying the real property tax due, it must show proof of its entitlement to such privileges as mandated by Section 206 of R.A. 7160, it provides:

‘SECTION 206. Proof of Exemption of Real Property from Taxation. – Every person by or for whom real property is declared, who shall claim tax exemption for such property under this Title shall file with the provincial, city or municipal assessor within thirty (30) days from the date of the declaration of real property sufficient documentary evidence in support of such claim including corporate charters, title of ownership, articles of incorporation, by-laws, contracts, affidavits, certifications and mortgage deeds, and similar documents.

If the required evidence is not submitted within the period herein prescribed, the property shall be listed as taxable in the assessment roll. However, if the property shall be proven to be tax exempt, the same shall be dropped from the assessment roll.’

“On the contrary, no proofs were ever submitted by Petitioner LHC or Petitioner-Appellant NPC.

“Finally, granting for argument’s sake that NPC is tax exempt, it cannot invoke or raise the provision of the PPA to extend its tax exemption to a taxable entity (LHC). To allow this would be doing indirectly what is prohibited directly.

“3. WHETHER OR NOT THE LOCAL BOARD OF ASSESSMENT APPEALS OF BENGUET ERRED IN MAKING OWNERSHIP THE TEST OF EXEMPTION OF THE SUBJECT PROPERTIES FROM REAL PROPERTY TAX.

“There is no question that real property shall be classified for assessment purposes on the basis of its actual use {paragraph b Section 198 of the Local Government Code of 1991 (R.A. 7160)}. Section 217 of R.A. 7160 explicitly provides that the ACTUAL USE of real property is the basis for assessment. It reads:

‘SECTION 217. Actual Use of Real Property as Basis for Assessment.- Real property shall be classified, valued and assessed on the basis of its actual use regardless of where located, whoever owns it, and whoever uses it.’

“Actual refers to the purpose for which the property is principally or predominantly utilized by the person in possession thereof (paragraph b of Section 199 of the Local Government Code of 1991). Hence, the subject properties were correctly classified as Industrial with an Assessment Level of 80% in accordance with Paragraph C of Section 218 of R.A. 7160.

“The LBAA did not err in ruling that the LHC a taxable entity and the owner of the subject properties are liable for the real property tax due. It is pre-mature for petitioner-appellant to invoke the exemption under Section 234 of the Local Government Code since the actual, direct and exclusive user/beneficial user of the subject properties is a taxable entity and not a government owned and controlled corporation.

“Worthy of note is the fact that the actual, direct and exclusive user of the subject properties is the Luzon Hydro Corporation or it is the beneficial user thereof, while Petitioner-Appellant National Power Corporation is the actual, direct and exclusive user of the power generated by the LHC in the use of the subject properties.

“RESCTFULLY SUBMITTED, for consideration of the Honorable Board. Other equitable remedies and relief under the circumstances are also prayed for.”

CBAA FINDINGS

NPC, in its Appeal docketed as CBAA Case No. L-57, assigned the following errors, viz:
“I. The Honorable Local Board of Assessment Appeals erred in ruling that for purposes of taxation, LHC and not the NPC should be considered the owner of the Power Plant and, therefore, the party liable for the taxes sought to be collected.

“II. The Honorable Local Board of Assessment Appeals erred in ruling that the subject properties are not exempt from real property taxes because NPC will only assume ownership thereof at a future date.

“III. The Honorable Board of Assessment Appeals erred in making ownership the test of exemption from real property tax.

On the other hand, LHC, in its Appeal/Petition for Review docketed as CBAA Case No. L-59, stated the following as its grounds for the appeal, to wit:
“I. THE LBAA COMMITED GRAVE AND PALPABLE ERROR, FOR BEING CONTRARY TO LAW AND THE FACTS, IN HOLDING AND IN REASONING THAT PETITIONER-APPELLANT IS LIABLE FOR THE PAYMENT OF REAL PROPERTY TAXES ON THE GROUNDS THAT: PETITIONER APPELLANT IS THE OWNER OF THE ASSESSED PROPERTIES; THAT THE PROVINCE OF BENGUET AND THE MUNICIPALITY OF BAKUN ARE MERE NOMINAL PARTIES TO THE MOA; AND THAT THE STIPULATION UNDER THE POWER PURCHASE AGREEMENT CONCERNING NPC’S ASSUMPTION OF REAL PROPERTY TAX LIABILITIES AS APPLICABLE ONLY ‘IN THE FUTURE’.

“II. THE LBAA GRAVELY ERRED IN SWEEPINGLY HOLDING, WITHOUT CITING ANY REASON, THAT PETITIONER-APPELLANT LIABLE IS FOR REAL PROPERTY TAXES WITH ASSESSED VALUE OF THE REAL PROPERTIES BASED ON THE SECTION 218 (C) NOT BASED ON SECTION 216 AND SECTION 234 OF THE LOCAL GOVERNMENT CODE, AND IN CLASSIFYING THE REAL PROPERTIES AS ‘INDUSTRIAL’ NOT BELONGING TO ‘SPECIAL CLASS’ AND/OR EXEMPT.”

The Respondents-Appellees, in their Answer/Comment, stated the supposed errors as follows:
“1. WHETHER OR NOT LBAA ERRED IN RULING THAT LUZON HYDRO CORPORATION, BEING THE OWNER AND USER OF THE SUBJECT PROPERTIES, IS LIABLE FOR THE REAL PROPERTY TAXES DUE;

“2. WHETHER OR NOT THE LBTAA ERRED IN RULING THAT THE SUBJECT PROPERTIES ARE NOT EXEMPT FROM REAL PROPERTY TAXES;

“3. WHETHER OR NOT THE LOCAL BOARD OF ASSESSMENT APPEALS OF BENGUET ERRED IN MAKING OWNERSHIP THE TEST OF EXEMPTION FROM REAL PROPERTY TAX.”

We believe that all the supposed errors committed by the LBAA in its Resolution dated July 13, 2004, as perceived by the appellants herein, could be reasonably summarized in the following issues, to wit:
1. Whether or not the subject machineries and equipment forming part of the Bakun AC Hydroelectric Plant (the “Power Plant”), particularly the concrete weir, concrete desander and concrete tunnel, are exempt from the real property tax;

2. Whether or not the subject machineries and equipment forming part of the Bakun AC Hydroelectric Plant (the “Power Plant”), particularly the concrete weir, concrete desander and concrete tunnel, fall under the classification “Special Classes” of real property; and

3. If and when the subject machineries and equipment forming part of the Bakun AC Hydroelectric Plant (the “Power Plant”), particularly the concrete weir, concrete desander and concrete tunnel, are considered subject to the real property tax, whether or not the Luzon Hydro Corporation is liable to pay the real property tax therefor.

DISCUSSIONS

1. Whether or not the subject machineries and equipment forming part of the Bakun AC Hydroelectric Plant (the “Power Plant”), particularly the concrete weir, concrete desander and concrete tunnel, are exempt from the real property tax.

Anent the first question, Appellants herein insist that, pursuant to the provisions of Section 234(c) of R.A. 7160, otherwise known as the “Local Government Code of 1991” (the “Code”), the subject properties are exempt from the real property tax, thus:
“SEC. 234. Exemption from Real Property Tax. – The following are exempted from payment of the real property tax:
x x x

“(c) All machineries and equipment that are actually, directly and exclusively used by local water districts and government-owned or –controlled corporations engaged in the supply and distribution of water and/or generation and transmission of electric power;

x x x’
(emphasis supplied)

As it concerns the instant case, Section 234(c) of the Code clearly requires that, in order to be exempt from real property tax, the machineries and equipment must be actually, directly, and exclusively used in the generation and transmission of electric power by a government-owned or –controlled corporation.

There is no question that the subject machineries and equipment are actually, directly, and exclusively used in the generation and transmission of electric power. There is also no doubt that NPC is a government-owned or -controlled corporation. The drawback or problem, however, is that the subject machineries and equipment are actually, directly and exclusive used by Luzon Hydro Corporation (LHC), admittedly a private entity as contra-distinguished from a government-owned or –controlled corporation, not NPC.

Ergo, the subject machineries and equipment are NOT EXEMPT from the real property tax.

2. Whether or not the subject machineries and equipment forming part of the Bakun AC Hydroelectric Plant (the “Power Plant”), particularly the concrete weir, concrete desander and concrete tunnel, fall under the classification “Special Classes” of real property.

As to the second issue, appellants herein argue that the subject machineries and equipment are “Special Classes” of real properties to be assessed at the ten percent (10%) level as provided under Sections 216 and 218(d), respectively, of the Code, thus:
“SEC. 216. Special Classes of Real Property. – All lands, buildings, and other improvements thereon, actually, directly and exclusively used for hospitals, cultural, or scientific purposes, and those owned and used by local water districts, and government-owned or –controlled corporations rendering essential public services in the supply and distribution of water and/or generation and transmission of electric power shall be classified as special.”(emphasis supplied)

“SEC. 218. Assessment Levels. –The assessment levels to be applied to the fair market value of real property to determine its assessed value shall be fixed by ordinances of the sangguniang panlalawigan, sangguniang panlungsod or sangguniang bayan of a municipality within the Metropolitan Manila Area, at the rates not exceeding the following:

x x x

“(d) On Special Classes: The assessment levels for all lands, buildings, machineries and other improvements:

Actual Use Assessment Level
Cultural 15%
Scientific 15%
Hospital 15%
Local water districts 10%
Government-owned or –controlled
Corporations engaged in the supply
and distribution of water and/or
generation and transmission of
electric power 10%”
(emphasis supplied)

Also as they concern the instant case, Section 216 of the Code requires that, in order to be classified as “Special Classes” of real property, the lands, buildings, machineries and other equipment or improvements thereon must be actually, directly and exclusively used for hospitals, cultural, or scientific purposes and those owned and used by local water districts, and government-owned or –controlled corporations rendering essential public services in the supply and distribution of water and/or generation and transmission of electric power.
As in the first issue, there is also no question that the subject machineries and equipment are actually, directly, and exclusively used in the generation and transmission of electric power. There is also no doubt that NPC is a government-owned or -controlled corporation. However, Section 216 and, for that matter, Section 218, require that the machineries and equipment are owned and used by a government-owned or –controlled corporation in the generation and transmission of electric power.

The corporation which is actually, directly and exclusive using the same machineries and equipment is Luzon Hydro Corporation (LHC). In addition, LHC, under the terms and conditions contained in the Power Purchase Agreement entered into by and between the NPC and LHC, is the owner of the subject machineries and equipment during the “Cooperation Period”. As stated, LHC is a private entity as contra-distinguished from a government-owned or –controlled corporation.

Therefore, the said machineries and equipment do not fall under the classification of “Special Classes of Real Property”.

3. If and when the subject machineries and equipment forming part of the Bakun AC Hydroelectric Plant (the “Power Plant”), particularly the concrete weir, concrete desander and concrete tunnel, are considered subject to the real property tax, whether or not the Luzon Hydro Corporation is liable to pay the real property tax therefor.

As correctly stated by appellant NPC, real property shall be classified for assessment purposes on the basis of its actual use [Section 198(b), R.A. 7160]. Thus, Section 217 of the Code provides:
“SEC. 217. Actual Use of Real Property as Basis for Assessment.- Real property shall be classified, valued and assessed on the basis of its actual use regardless of where located, whoever owns it, and whoever uses it.”

As also correctly stated by appellant NPC, “In real estate taxation, therefore, the unpaid tax attaches to the property and is chargeable against the taxable person who had actual or beneficial use and possession of it regardless of whether or not he is the owner (Testate Estate of Concordia T. Lim v. City of Manila, 182 SCRA 482 [1990]).”

In the instant case, it is the Luzon Hydro Corporation (LHC) which has the actual use and possession of the subject properties. LHC, therefore, is the one liable for the real property tax on the subject properties. Of course, pursuant to the provisions of Article 8.6 of the Power Purchase Agreement (PPA) between the NPC and the LHC, payment of the said tax is assumed by NPC. Respondents-Appellees would not be concerned whether or not LHC is refunded by NPC for the real property taxes paid by the former (LHC). The PPA is a private agreement or arrangement between the NPC and the LHC.

It does not really matter who or which entity is liable for the realty taxes on the subject properties since, as aforesaid, the said tax is against, and attaches to, the real property assessed. If nobody pays, the Local Government Unit (LGU) concerned, through its treasurer, would just avail of the remedies provided for by the Code for collection of the real property taxes.

NPC portrays itself as “the actual, direct and exclusive user of the Power Plant and the beneficial owner thereof. NPC’s interest in the Power Plant, coupled with the provisions of the PPA, makes it the proper party subject to the real property taxes, albeit only where the real property taxes are due.”

We think it was necessary for appellant NPC to include the phrase “albeit only where the real property taxes are due” in the above-cited statement because of the contrary provisions of Article 2.13 of the PPA, thus:
“Article 2.13. Ownership of Power Station. From the Effective Date until the Transfer Date, the Operator shall own the Power Station and all the structures, fixtures, fittings, machinery and equipment on the Site or used in connection with the Project which have been supplied by it or at its cost.”

The words “actual,” “direct,” and “exclusive,” seem plain enough. In any case, Webster’s Third New International Dictionary defines these words, thus:
“Actual” means “existing or taking place at the time.”
“Direct” means “proceeding from one point to another in time or space without deviation or interruption.”
“Exclusive” means “excluding or inclined to exclude others.”

Except for the monitoring activities of NPC personnel in certain phases of LHC’s operations, LHC has the actual, direct and exclusive and uninterrupted use and possession of the Power Plant during the “Cooperation Period” as provided by the said PPA.

NPC also thinks of itself as the “beneficial user” and “beneficial owner” of the Power Plant. Be that, as it may, a “beneficial user” is taxable under Section 234(a) of the Code.

The relationship between NPC and LHC under the PPA is that of Supplier and Exclusive Distributor, with LHC as the supplier and NPC, the exclusive distributor. Thus, Article 8.1 of the PPA states:
“Article 8.1. Supply. NPC agrees to take and pay for all electricity available from the Power Station in accordance with the procedures set out in the Sixth Schedule and the Operating Parameters. The Operator shall dedicate the entire Power Station output (net of Power Station usage) to NPC.”

We appreciate the laudable intention of Congress behind the enactment of R.A 6957, otherwise known as the BOT Law. However, we find it unthinkable that the same Congress was unaware of the BOT Law when it enacted R.A. 7160, otherwise known as the Local Government Code of 1991.

WHEREFORE, premises considered, the Appeal under CBAA Case No. L-57 and the Petition for Review under CBAA Case No. L-59 are hereby DISMISSED for lack of merit.

SO ORDERED.

Manila, Philippines, July 3, 2012.

SIGNED
OFELIA A. MARQUEZ
Chairman

SIGNED SIGNED
ROBERTO D. GEOTINA CAMILO L. MONTENEGRO
Member Member

This case is yet another example that the spirit of BOT law remains unrecognized. The current definition of the expression “actually, directly and exclusively used” restrict the entitlement for exemption into a situation where the NAPOCOR is expected to maintain a physical and active participation/presence in the operation and management of the power plant. Unfortunately, given the time and opportunity to adopt such measures, the petitioner has not presented an iota of evidence that could make this Board agree to their stance. Being unsupported by evidence, the principle of stare decisis operates adverse to petitioners claim and dictates no other conclusion.